Anne Tucker Anne Lipton writes:
The Pep Boys – Manny, Moe & Jack (NYSE: PBY) merger triangle with Bridgestone Retail Operations LLC and Icahn Enterprises LP is proving to be an exciting bidding war. The price and the pace of competing bids has been escalating since the proposed Pep Boys/Bridgestone agreement was announced on October 16, 2015. Pep Boys stock had been trading around $12/share. Pursuant to the agreement, Bridgestone commenced a tender offer in November for all outstanding shares at $15.
Icahn Enterprises controls Auto Plus, a competitor of Pep Boys, the nation's leading automotive aftermarket service and retail chain. Icahn disclosed an approximately 12% stake in Pep Boys earlier in December and entered into a bidding war with Bridgestone over Pep Boys. The price climbed to $15.50 on December 11th, then $17.00 on December 24th. Icahn Enterprises holds the current winning bid at $18.50/share, which the Pep Boys Board of Directors determined is a superior offer. In the SEC filings, Icahn Enterprises indicated a willingness to increase the bid, but not if Pep Boys agreed to Bridgestone's increased termination fee (from $35M to 39.5M) triggered by actions such as perior proposals by third parties. Icahn challenged such a fee as a serious threat to the auction process.
Regardless of which company ends up claiming control over Pep Boys, this is a excellent example of Revlon principles in action and also shows the effect of merger announcements (and the promised control premiums) have on stock price.
Which raises the question: If Icahn sued, would Pep Boys' increased termination fee (standing alone) violate Revlon? I don't think so. Pp Boys has 55 million shares outstanding. At $18.50 per share, the deal currently has a value of $1,017,500,000. A $39.5M termination fee thus is only 3.88% of the deal value, which is well within the range courts have approved.
In the corporate world, termination fees are a common and generally accepted method to “reimburse the prospective purchaser for expenditures incurred in pursuing the transaction.” Gray v. Zondervan Corp., 712 F.Supp. 1275, 1276-77 n. 1 (W.D.Mich.1988).Cancellation fee provisions typically require the [seller] to pay the bidder a specified dollar amount. * * * [T]he fee ordinarily ranges from one to five percent of the proposed acquisition price. A cancellation fee reduces the risk of entering a negotiated merger by guaranteeing the initial bidder reimbursement for the out of pocket costs associated with making the offer and, in some instances, for the bidder's lost time and opportunities. Accordingly, they are increasingly common in negotiated acquisitions.Stephen M. Bainbridge, Exclusive Merger Agreements and Lock-Ups in Negotiated Corporate Acquisitions, 75 Minn.L.Rev. 239, 246 (1990).
St. Jude Med., Inc. v. Medtronic, Inc., 536 N.W.2d 24, 27 (Minn. Ct. App. 1995).
To be sure, while Delaware courts have "upheld termination fees of greater than three percent of total deal value," the courts have also made clear that "[t]hough a '3% rule' for termination fees might be convenient for transaction planners, it is simply too blunt an instrument, too subject to abuse, for this Court to bless as a blanket rule." Louisiana Mun. Police Employees' Ret. Sys. v. Crawford, 918 A.2d 1172, 1181 n.10 (Del. Ch. 2007). Instead, "plaintiffs must specifically demonstrate how a given set of deal protections operate in an unreasonable, preclusive, or coercive manner, under the standards of this Court's Unocaljurisprudence, to inequitably harm shareholders." But it's hard to see how a termination fee of less than 4% is going to be deemed preclusive or coercive if it's the only deal protection device in play.
Under Unitrin, a defensive measure is disproportionate and unreasonable per se if it is draconian by being either coercive or preclusive. A coercive response is one that is “aimed at ‘cramming down’ on its shareholders a management-sponsored alternative.”A defensive measure is preclusive where it “makes a bidder's ability to wage a successful proxy contest and gain control either ‘mathematically impossible’ or ‘realistically unattainable.’ ”